Goldilocks fights back but bears still swinging

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LONDON (Reuters) – The fight between Goldilocks bets – on the not too hot, not too cold global economy – and market bears who have delivered some hefty blows in recent weeks, continued on Tuesday with little sign yet of a clear winner.

Stocks see-sawed with solid gains in China [.SS] and other Asian emerging markets offset by a tumble in Japan and then a red start for most of Europe’s bourses and Wall Street futures in New York. [.EU][.N]

Tokyo’s .N225 0.65 percent fall had been compounded as the yen JPY= hit a five-month high amid a renewed bout of dollar .DXY weakness which had also helped lift bond and commodity markets after recent turbulence. [O/R][GVD/EUR]

“As long as we don’t get dragged into (a U.S.) recession the market tends to recover quite quickly,” said Donough Kilmurray, Managing Director, Investment Strategy Group at Goldman Sachs, seeing only a 10 percent chance of that this year.

Still, caution lingered in the broader markets following the U.S.-led tumble in riskier assets last week and ahead of U.S. inflation data on Wednesday. A stronger-than-expected reading on price pressures could trigger a fresh wave of selling.

World markets’ main ‘fear gauge’, the VIX volatility index .VIX was nudging higher again after two days of easing back.

The currency market remained choppy too.

Britain’s pound was briefly jolted to a session high of $1.3924 GBP=GBP=D4 after headline annual UK inflation came in at 3.0 percent, a tenth of a point above forecasts and holding close to its highest level in nearly six years.

The data highlighted the challenge the Bank of England faces as it tries to return price growth to target over the next two years. The dollar’s index against a basket of six major currencies .DXY fell over 0.4 percent to 89.923 as the bears returned. Last week had been the greenback’s best since 2016.

It was 0.3 percent lower at 108.285 yen JPY=, while the euro added 0.2 percent to $1.2322 EUR= and the Swiss franc CHF= also made ground. [/FRX]

“The (U.S.) consumer prices numbers (on Wednesday) bear close watching as if it shows a strong rise, that could rattle U.S. long-term yields,” and currencies and stocks said Koji Fukaya, president of FPG Securities in Tokyo.

BOND DEMAND

The 10-year Treasury note yield US10YT=RR – which moves inverse to its price – fell back under 2.83 percent in Europe trading after rising to a four-year peak of 2.902 percent on Monday.

German bonds were also back in demand as recent multi-year highs on yields on both sides of the Atlantic proved attractive for some investors.

Germany’s 10-year yield fell by almost 2 basis points to 0.73 as it retreated further from the 2-1/2 year high of 0.81 percent hit last week. DE10YT=RR

“I think what we are seeing is a little bit of a consolidation,” said DZ Bank strategist Christian Lenk. “Given the pace of the move so far, we had to take a break somewhere and we have reached that region now.”

South Africa’s rand fell 0.25 percent to 11.92 per dollar ZAR=D3 following news that the country’s ruling party African National Congress had opted to sack President Jacob Zuma.

The rand had risen 2 percent over the past two days, helped by hopes that Zuma would step down, but ran into resistance as the latest news was seen potentially prolonging a political standoff.

Other commodity-sensitive currencies fared better. The Australian dollar was steady at $0.7866 AUD=D4 after rising about 0.6 percent overnight on the back of higher commodity prices and improvement in broader risk sentiment. [AUD/]

Copper prices on the London Metal Exchange CMCU3 extended an overnight rally to trade 1.4 percent higher at $6,927.00 per tonne. [MET/L]